Ally Admits It Is Actively Considering Bankruptcy for ResCap

Ally Financial, in a new public filing, finally admits that it is weighing bankruptcy protection for its struggling residential mortgage division which is facing potential additional losses of up to $4 billion.

In a new 10-Q filing that came late Friday, Ally notes that Residential Capital Corp. missed a $20 million bond payment (on $473 million of unsecured debt) and is considering its next course of action which may include the parent company providing more cash to ResCap or a “reorganization under bankruptcy laws.”

For the first time Ally said it is “actively considering” a bankruptcy filing. To date, it has declined to comment on rumors about a possible filing for ResCap which still uses the trade name GMAC Mortgage.

The government-owned bank also says ResCap is facing “possible losses over time related to the litigation matters and potential repurchase obligations” of up to $4 billion. (The cost could also be zero.)

“This estimated range is based on significant judgment and numerous assumptions that are subject to change, and which could be material,” the company writes. “However, as a result of ResCap's current financial position, we believe ResCap's ability to pay for any such losses is very limited.”

Although Ally appears to have its GSE buyback issues under control, the bank experienced an increase in new private-label claims during the first quarter, according to the SEC filing.

In the first quarter Ally was hit with $253 million of PLS repurchase claims compared to $133 million in the year-ago quarter, an increase of almost double.

The vintage that caused the most trouble for Ally is the year 2006 where $95 million of requests were filed.

Ally notes that after it receives a claim under representation and warranty obligations, it reviews the request “to determine the appropriate response (e.g. appeal and provide or request additional information) and take appropriate action (rescind, repurchase the loan, or remit indemnification payment).”

Like many originators suffering from buyback claims the bank notes that in the past, “repurchase demands were generally related to loans that became delinquent within the first few years following origination” but adds, “As a result of market developments over the past several years, investor repurchase demand behavior has changed significantly. GSEs and investors are more likely to submit claims for loans at any point in the loan's life cycle, including requests for loans that become delinquent or loans that incur a loss.”

Ally is 74% owned by Treasury. The bank hopes to sell some of its common stock to the public this year.